Small Business Employees Significantly Trail Their Large Company Counterparts in Retirement Savings and Preparedness

Business Wire, April 30, 2007

Annual Transamerica Retirement Survey Highlights Major Difference in How Large and Small Employers and Employees Treat Retirement Benefits

LOS ANGELES -- Small business employees are at a disadvantage when it comes to retirement savings, according to the results from the Eighth Annual Transamerica Retirement Survey.1 When compared to employees at large companies, small business employees are less likely to have access to a 401(k) or employee-funded retirement plan, and are less active than their large company counterparts in saving for a comfortable retirement. For small business employees, this translates to lower household retirement savings and a greater number who expect to rely on Social Security as their primary form of income in retirement.

According to the results, only 18 percent of small business employees reported having saved $100,000 or more in all household retirement accounts, while 29 percent of employees at large companies reported having saved that much. Similarly, only 37 percent of small business employees believe that their employer-sponsored retirement plan will be their primary source for income during retirement, while 19 percent still expect to rely on Social Security as their primary source. This is a stark contrast to the 49 percent of large company employees who expect their retirement plan to be the primary source, compared to only 11 percent who still expect to rely on Social Security.

"Not enough is being done to help small business employees prepare for a comfortable and secure retirement," says Catherine Collinson, retirement and market trends expert for the Transamerica Center for Retirement Studies. "Lower savings rates ultimately lead to a reliance on the future of Social Security, which underscores the need for a wake-up call among employers and employees alike."

Employers and Employees Both at Fault

One major reason for this gap has to do with access to a retirement plan. Data from the survey found that only 65 percent of small business employees report being offered an employee-funded retirement plan, compared to 84 percent of employees at large companies. Meanwhile, 20 percent of small business employees reported not receiving any form of retirement benefit from their employer. Furthermore, among those with access to a plan, only 69 percent of small business employees reported being offered an employer matching contribution, while 86 percent of large company employees are offered one.

Employers are not entirely to blame, however. When offered a plan, small business employees are less likely than employees of large companies to participate or have money invested in the company's plan (70 percent vs. 76 percent), while also contributing a slightly lower percentage of their salary (based on median). Moreover, small business employees are also less likely to be saving outside of work (52 percent, compared to 61 percent of large company employees). Of those small business employees that aren't currently participating, 31 percent don't plan to in the future.

One contributing factor to this discrepancy is that small business employees tend to earn less than employees at larger companies. However, small business employees are slightly less likely than large company employees to cite being "financially stretched" as a reason for not participating in their company's retirement plan (26 percent vs. 29 percent).

"As the numbers of small businesses and small business employees in the U.S. continue to grow, it becomes increasingly vital that these employees receive the tools they need to prepare for a comfortable retirement," says Collinson. "Under the current circumstances however, there are ample opportunities for employers and employees alike to help improve the status of retirement preparedness among small businesses."

Small Business Employers Showing Little Signs of Future Improvement

In light of this difference between small and large companies offering plans, there is equally disconcerting data to suggest little progress is on the horizon: nearly three-quarters (73 percent) of small businesses that don't currently offer a retirement plan indicated that they weren't likely to in the near future. In fact, only three percent of small business surveyed stated that they were "very likely" to offer one in the near future.

The four most common reasons given by employers for not likely offering a plan in the next two years were: company is not big enough (43 percent), lack of management or employee interest (41 percent and 34 percent, respectively), and cost concerns (34 percent).

"While these reasons might be valid, it's possible that they may too be misconceptions," says Collinson. For example, 90 percent of small business employees consider a 401(k) or other employee self-funded plan to be important, while 61 percent said they would likely leave their job for one that does offer retirement benefits. Added Collinson, "Employers need to weigh these reasons against the costs of not offering a plan - such as a dissatisfied or shrinking staff."